Stocks were already weak before the ratings agency cut Spain's debt one notch. While the cut still leaves the debt in investment grade territory, as opposed to junk, it nonetheless managed to rattle investors in a thinly-traded session.

"People were expecting a nice slow day and then the Spain news turned things around," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

"It may have been anticipated, but It's still a big deal," he said. "It tells us we are not out of the woods yet."

Friday marked the end of a rough month on Wall Street in which stocks plunged on worries about the European debt crisis, the weak euro and bets that the market advance had outpaced any economic recovery.

The Dow lost 7.9%, seeing its worst month since February 2009, when it fell 11.7%, and worst May since 1940, when it plunged 21.7%.

The Nasdaq lost 8.3%, its worst month since November 2008, when it dropped 10.8%, and its worst May since 2000, when it skidded 11.9%.

The S&P 500 declined 8.2%, its worst month since February 2009, when there was an 11% loss, and its worst May since 1962, when the drop was 8.6%.

Stocks rallied Thursday after China said it will stay invested in European debt. The Dow jumped 285 points, or almost 3%, and the S&P 500 and Nasdaq both gained more than 3%.

After such an advance, investors pled exhaustion Friday, with trading pretty quiet as many market pros stepped out ahead of the Memorial Day weekend.

Economy: A morning report from the Commerce Department showed consumer income picked up last month, but spending didn't follow suit.

Personal income rose 0.4% in April, matching the gain in March. Economists surveyed by Briefing.com expected the 0.4% gain. Personal spending was flat after rising 0.6% in the previous month. Spending was expected to grow by 0.3%.

The Core PCE, the report's inflation component, rose 0.1%, in line with estimates, after increasing 0.1% in March.

The May consumer sentiment index from the University of Michigan rose to 73.6 from 73.3 last month. Economists expected it to ease to 73.2.

The Chicago PMI, a regional reading on manufacturing, fell to 59.7 in May from 63.8 in April, versus forecasts for a drop to 60.

Commodities: U.S. light crude oil for July delivery fell 58 cents to settle at $73.97 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery rose 30 cents to settle at $1,212.20 an ounce.

Bonds: Treasury prices gained modestly, lowering the yield on the 10-year note to 3.31% from 3.34% late Thursday. Treasury prices and yields move in opposite directions.

Trading volume: Market breadth was negative. On the New York Stock Exchange, losers beat winners two to one on volume of 1.45 billion shares. On the Nasdaq, decliners topped advancers by two to one on volume of 2.18 billion shares.

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